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Keeping An Eye on Fuel Prices

For many Fijians, the cost of fuel is one of the biggest regular expenses, and as such, there is a need to keep a close watch on the price. The
11 Jul 2016 11:31
Keeping An Eye on Fuel Prices
For many Fijians, the cost of fuel is one of the biggest regular expenses, and as such, there is a need to keep a close watch on the price.

For many Fijians, the cost of fuel is one of the biggest regular expenses, and as such, there is a need to keep a close watch on the price.

The Fiji Commerce Commission (“Commission”) conducts quarterly price reviews to determine the wholesale and retail prices of petroleum products, namely, motor spirit, gasoil (diesoline), kerosene and premixed outboard fuel.

The quarterly restatements of prices are based on a three monthly average of international benchmark, Means of Platts Singapore (MOPS), exchange rate and international freight in addition to handling charges based on the submissions by the fuel companies.

This article will focus on factors that determine the oil prices in the world market and how the changes in the world market are translated into the Fijian market.

 

Key factors influencing international prices

Prices in regional markets for different products can be volatile due to the impact of factors and events unique to one market or all markets globally.

As a result, focusing on the longer term price trends in the relevant regional market for specific products is important to understanding what is driving movements in the prices of specific fuels here.

The below outlines some of the fundamental market drivers and other influences impacting on regional and global market prices, and therefore Fijian prices, over time.

n changes in regional and global supply balances in both the short and longer ter

n major supply disruptions from natural disasters, war, civil unrest and strikes

n seasonal demand and demand spikes

n inventory management

n shipping availability and freight rates

n market trading activities and strategies

n short term decisions of oil producing countries, National Oil Companies (NOCs) and nations holding strategic reserves

n alternative fuel developments

n changes in economic conditions/sentiment in both the short and longer term

n new oil discoveries

n investment in new oil production/refining capacity

n future global demand and supply balances

n global economic growth

n costs of oil production and refining

n technological progress

n long term policies of NOCs and oil producing nations

n population growth

n regulation and Government policy

 

All of the factors above can have an influence in determining the final price of fuel that consumers purchase and the role that each of these factors plays can change over time or in many instances offset each other.

 

Link between international-Fijian fuel prices

There is a close relationship between international fuel prices and Fijian wholesale and retail fuel prices. Fiji’s regional market for petroleum products is the Asia–Pacific market. Singapore prices are the key pricing benchmarks for Fiji, because Singapore represents the competitive source of supply for Fiji.

Growth in demand for fuel in Fiji will continue to be largely met by imports in the future, further strengthening the price relationship with Asian fuel prices.

 

  1. Fijian fuel prices are dependent on world market prices for crude, petroleum products

Crude oil and refined petroleum products (eg. petrol, diesel) are bought and sold in their own markets and are also regionally based.

As they are different products – with their own unique physical characteristics, uses, and demand and supply factors – they are priced and traded separately. Different crude oils will also be priced differently for the same reasons.

The price of crude oil is typically the largest determinant factor of the international prices for petroleum products which are processed or refined from crude oil.

However, the market prices for petroleum products can also influence crude oil prices (eg. higher demand for refined diesel can flow through to higher crude prices).

The pricing of crude oil and petroleum products in regional markets is highly transparent, through the use and publication of ‘markers’ or price benchmarks.

These benchmarks are convenient indicators of what is happening with prices in regional markets.

Crude oil and petroleum products are sold through a variety of ‘term contract’ arrangements and in ‘spot’ transactions.

Generally these transactions are based on a formula approach where a marker is used as the base, and then a quality differential is added for petroleum products (premium/discount for fuel quality standards) and a market premium/discount is added for the crude being purchased.

The price benchmark used in contracts for specific crude oils or petroleum product sales may change over time and between transactions, depending on market conditions and individual negotiations between the buyer and seller.

 

  1. Exchange Rate Movement

As the Singapore benchmark prices for fuel are quoted in $US per barrel terms, their price in Fijian dollar terms reflects movements in both the $US benchmark price for fuel as well as movements in the $US/$FJD exchange rate.

n This means that exchange rate movements can offset or magnify changes in Singapore fuel prices.

n Fluctuations in the exchange rate can also independently impact on the market prices for shipping and fuel quality premiums which are also quoted in $US terms.

Singapore market prices for fuel plus shipping costs and Fijian taxes – called the ‘refined product cost’ – is almost the entire retail price of fuel in Fiji.

 

  1. Time impact of international fuel price reduction on the Fijian market

It must be realised that the Fiji imports refined fuel from Singapore.

The whole process of placing an order, blending of fuel in Singapore to meet the Fijian fuel quality standards and shipment to Fiji takes approximately 65 days. What this means for Fiji is that the impact of today’s international price will impact the domestic prices after 65 days from today.

The Fiji Fuel Price Template caters for this time lag by reviewing the fuel prices on a quarterly basis.

Therefore it is important to note that increase or decrease in prices may not reflect the domestic price of fuel as the domestic prices in fuel is subject to the time delay (“time lag”) of 65 days. Not accounting for this time lag leads to incorrect conclusions about how Singapore fuel prices flow through to prices in Fiji.

Apart from international prices, freight rate and the exchange rate has a major impact on fuel prices including other factors.

These variables or factors that are employed include but not limited to conversion costs, insurance costs, duty, taxes, port charges, operating costs, the applicable wholesale and retail margins to determine the final retail / wholesale prices.

Next Week: LPG Pricing in Fiji

For more information/details on Fiji Commerce Commission and Commerce Commission Decree 2010, visit their website on http://www.commcomm.gov.fj or join their Facebook page at https://www.facebook.com/commcomm.gov.fj

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